Now, we have had testimony here that they have to set up reserves to take care of losses, and that means risks.

Mr. Loos. Certainly that type of cooperative that has to set up reserves to anticipate possible losses is one which has an inventory, for example, or one, such as in the case Mr. Holman spoke about-the butter cooperative that makes its payments monthly to its patrons before they sell all of their butter. They have a risk; yet just think how much less that risk is.

You see, the cooperative has a contract under which its members take just the difference between what the cooperative gets and what its expenses are. Think how much less that risk is than the risk that the dealer takes or the commercial manufacturer who goes out and buys milk and manufactures butter and maybe a month later gets it all sold. He has taken all of the risk of possible decline in the market.

Mr. MASON. Let us forget about the degree of risk, because there are various degrees, and let us stick to the point that if capital is invested and a risk is taken, that means profit. Now, Mr. Holman said it did not mean profit.

Mr. Loos. It does not necessarily mean a risk, because there are thousands of corporations that—

Mr. MASON. There might be a loss.

Mr. Loos. Yes; and the degree of risk is in proportion to the degree of profit.

Mr. MASON. You can have a loss, on the one hand, and you can have a profit, on the other, and you cannot separate the two at all from invested capital.

Mr. Loos. Well, I think you can, Mr. Mason. I do not think it follows at all that because economic profits flow from capital, from risk capital, you cannot make an agreement, as a cooperative does, under which their total cost of operation will be deducted from their proceeds of marketing or their expenses of the distribution of supplies, and any economic profit that there may be in that transaction becomes a part of the obligation of the cooperative to make the refund to the patron, so there is nothing left for the cooperative.

Mr. MASON. Mr. Loos, I studied economics some years ago, and I learned the truth of certain fundamental principles. I will have to say that you are an excellent-what is that old Greek-Sophicles.

Mr. Loos. I am sorry, but I did not study Greek enough to recognize just what that means.

Mr. MASON. That is the word from which the word "sophistry"

comes.

Mr. Loos. Well, I rather gathered it was along that line. But I assure you, Mr. Mason, that I am not endeavoring to speak in that vein. I believe, I firmly believe, that if you will just analyze these transactions one by one and follow them through to the result, you will reach the same conclusion that I have, that is, that when you make a refund to the customer, to the patron, there just is not any income to the cooperative.

Mr. MASON. That is all.

Mr. HARRISON. Mr. Loos, maybe we can help Mr. Mason a little bit. He referred to this sale that the farmer makes to the marketing cooperative. Now, in the good old days when the English people had

enough money to buy some of our Virginia apples, the orchardist used to ship his apples to importing houses who sold them on the auction in Liverpool. The importing house would give that orchardist an advance on these apples. Then, when they were sold on the auction, sometimes the sale was bad and the man who made the advance would not come out very well. In other words, there was that risk. He took the risk when he made the advance.

At other times, not frequently enough, unfortunately, the fruit would sell at the auction at a substantial advance, and the commission merchant would deduct his commission and pay the rest of the purchase price to the farmer.

Now, certainly that farmer did not sell his fruit to that commission merchant. You certainly would not charge income taxes to the commission merchant based on a percentage of what he sold these fruits for over and above the advance, would you?

Mr. Loos. No, sir.

Mr. HARRISON. Do I make myself clear?

Mr. Loos. Yes. That is exactly the situation.
Mr. HARRISON. It is the situation?

Mr. Loos. It is exactly parallel to the situation of the cooperative as a selling agency.

Mr. REED. Reference has been made here to the professor. I have great respect for professors, but sometimes, you know, they are a little bit absent-minded. I remember the case of a professor of Cornell who was explaining gravitation. He went out to a bridge about 125 feet above a gorge; he held his watch in one hand and a stone in the other hand, and said to his class, "Now, you observe." He dropped his watch, and held tight to the stone.

Mr. MARTIN. I will not ask any questions at this point. I do want to take this opportunity to tell the committee that Mr. Loos is one of our great Iowans. His father was the head of the department of economics of the University of Iowa and made a distinguished record there. He was head of the department at the time I was a student there before World War I. I have known Mr. Loos since our school days there together at the University of Iowa, and he rates as a great economist and a great lawyer, and we are very proud of him. Mr. Loos. Thank you very much, Mr. Martin.

Mr. HARRISON. Are there any further questions?
If not, we thank you, Mr. Loos, for your help.

By direction of the chairman, the committee will now adjourn until 1:30 o'clock.

(The following was submitted for the record:)

Hon. ROBERT L. DOUGHTON,

HOUSE OF REPRESENTATIVES, Washington, D. C., March 7, 1951.

House Office Building, Washington, D. C.

Chairman, Ways and Means Committee,

DEAR COLLEAGUE: Enclosed is copy of a letter from John M. Van Horn, secretary, Mutual Orange Distributors, Redlands, Calif.

May I request that it be made a part of your record when the matter is brought before the committee.

Sincerely yours,

HAROLD A. PATTEN,

Member of Congress.

Hon. HAROLD A. PATTEN,

MUTUAL ORANGE DISTRIBUTORS, Redlands, Calif., February 26, 1951.

House Office Building, Washington 25, D. C.

DEAR CONGRESSMAN PATTEN: Your files doubtless will reveal that on February 20, 1951, we addressed a telegram to you referring to H. R. 8920, wherein Mutual Orange Distributors, as a farmer-owned marketing cooperative handling California and Arizona citrus, protested inclusion in that proposed legislation of taxes on annual refunds to our members since such refunds are nothing more than very minor adjustments in the costs of marketing the crops of our members. As you know, the matter of taxation of cooperatives currently is being considered before the House Ways and Means Committee. Therefore, our board of directors has again gone on record confirming its position as being opposed to such changes in the Federal tax laws as regards cooperative organizations. We feel since there is no income involved, that taxes like the one proposed are punitive in nature and, therefore, unsound and inequitable.

Anything you can do to obviate unwise changes in section 101 (12) of the Internal Revenue Code which will throw an inequitable tax burden on cooperative organizations will be appreciated.

Yours very sincerely,

JOHN M. VAN HORN, Secretary.

(Whereupon, at 12:45 p. m., a recess was taken until 1:30 p. m., of the same day.)

AFTERNOON SESSION

(The committee reconvened at 1:30 p. m., upon the expiration of the recess.)

The CHAIRMAN. The committee will come to order.

The next witness is Mr. D. W. Brooks, of the National Council of Farmer Cooperatives of Atlanta, Ga.

Mr. CAMP. Mr. Chairman?

The CHAIRMAN. Mr. Camp.

Mr. CAMP. I want to say a word of introduction for this distinguished gentleman from my State whom I have known practically all of his life. He was born in the same town that Ty Cobb was born in and he has gone just about as far in cooperative work as Ty went in baseball.

Last year he was elected as president of the National Council of Farmer Cooperatives.

The Atlanta Constitution had this to say about his election:

Georgians acquainted with his work are especially gratified at the election of D. W. Brooks of Atlanta, as president of the National Council of Farmer Cooperatives. Mr. Brooks' contributions to agriculture in Georgia and the South have been many. He was named man-of-the-year in Georgia's agriculture last year. The association which he now heads has rendered fine services for farmers, particularly small farmers. The combination will be a happy one and beneficial to farmers everywhere.

On the same day the other daily paper of Atlanta, the Atlanta Journal, had an equally gratifying editorial complimentary to Mr. Brooks.

Mr. Brooks heads the Cotton Producers Association. I think it is one of the model farm cooperatives, that is, marketing cooperatives. And I request the committee to ask Mr. Brooks any questions they need to to get information about farm cooperatives. This man, I think, can give you

Thank you, sir.

the answers.

The CHAIRMAN. Very well; thank you very much, Mr. Camp.

I hope you will all keep in mind that we heard only two witnesses this morning and we have quite a number to go through this afternoon and we are starting out behind schedule.

Mr. Brooks, will you please give your name and your address and for whom you appear for the record?

STATEMENT OF D. W. BROOKS, PRESIDENT, NATIONAL COUNCIL OF FARMER COOPERATIVES, ATLANTA, GA.

Mr. BROOKS. I am D. W. Brooks and I am president of the National Council of Farmer Cooperatives, and my home is in Atlanta, Ga. The CHAIRMAN. How much time will you need, Mr. Brooks?

Mr. BROOKS. I think I will need only about 15 or 20 minutes.

The CHAIRMAN. Very well, proceed in your own way. However, try to keep within that time as we have to try to be fair to the other witnesses.

Mr. BROOKS. That is right.

I also have Mr. Karl Loos with me because there might be some technical questions you may care to ask and he is here to answer them. The CHAIRMAN. We are very glad to have Mr. Loos with us.

Mr. BROOKS. There are a number of things that have been brought up about the hearing that I want to discuss with you here today in order that we might get them clarified.

For example, yesterday, and to some extent today, we heard a great deal about the letters which you Congressmen have received from business people back home. Now, I want to say to you that the farm cooperatives have deliberately tried to keep letters from coming to you because we have felt that this was an issue that should be settled on its merits and not on the basis of pressure. If there is any other consideration to be given, I think that we can get you many farmers who have been benefited by farm cooperatives, and get 10 letters of that type for every 1 that you have had up to the present time. We naturally assumed that you did not want those letters, and we have not passed the information on to our members as to what is happening up here. We have felt this was a matter that should be settled on its merits and not on the basis of pressure, and we have conducted ourselves in that manner.

Now, the next thing I would like to bring before this committee is the reason why some of these co-ops organize. In the case of our particular association, it was organized in 1933. The reason why we, as cotton farmers, organized this association was because our per capita income in the State of Georgia had gone down to $74. That was our per capita income in Georgia when our association was organized. That was the reason why it was organized, because we had reached a starvation point and our sphere of life was so low that we had to do something as farmers to raise our standard of living, and we thought one way to do it was to form a cotton cooperative to bring about better marketing conditions.

Now, even at the present time, our per capita income in Georgia on the farms is low. This last year it was $375, so that we have made tremendous progress, but still we have a relatively low income as compared to most of the people of this Nation.

In the case of farmers generally in the Nation, the per capita income is $800 now, which is a little more than twice what we have in Georgia.

Considering the Nation as a whole, the other people who are not farmers, the per capita income is $1,600, so that we still have a long ways to go in order to be on an equal basis from an income standpoint as compared to the other people of this Nation.

Naturally, the farmers want to get themselves on an equal basis. with the others, and they feel that one of the ways to do it is to do some of these things for themselves instead of letting somebody else do the things for them.

Now, another question that has been raised here a number of times is the question of small co-ops and large co-ops. It seems that a small co-op, as I understand it, is described as the sheep and the large co-op as the wolf. I would like to say this: That we started and tried the small co-op method. A group of us farmers got together and tried. to pool our cotton and asked the buyers to come in. These buyers got into a partnership agreement, and instead of us getting more for our cotton we got a great deal less. On the first sale that we made, instead of getting 18 cents, which was the proper price for our cotton, we got 12 cents, and we heard later that the buyers had gotten together and decided the way to put this bunch of farmers in their place was to skin them good. They apparently agreed among themselves that if the farmers tried to get together they would give them less than they would if the cotton had been brought in by individuals individually. So that we found this business of being a sheep generally worked out so that we were shorn, so we felt that we had learned that we had to do more than that if we were to survive in this competitive system.

Now, another question that has been brought up here from time to time is the volume the co-ops have done in this country. There have been many statements that would lead you to believe that because of a tax advantage the co-ops were just going out now and taking over all the business. The facts do not support any such conclusion at all. I think the claims on the other side have been either in numbers of cooperatives or members or in dollars-and-cents volume. Now, you know and I know that the prices of all commodities have gone up tremendously, and that is not a fair way of judging the progress of farm co-ops. The only way to judge the progress rightly, in my opinion, is on a percentage of the volume done in this country. And when you put it on a percentage basis, the farm cooperatives have not gone up in proportion to other types of business.

For example, in the case of the marketing cooperatives, the greatest amount that we ever handled was 31 percent during the depression of 1931-32 because farmers were driven to co-ops at that time. Today, the last figures I have here show that we were down to 22 percent of the total marketings of farmers in the country in 1946-47. So the figures do not support many, many of the things that have been said before the committee; they do not show that co-ops have taken over the business of this country or are even increasing the proportion of the farmers' total business which they handle.

I could give you the same thing in the case of cotton cooperatives. We started back in 1921-22 and by 1925 we were up to 9.1 percent. That was 25 years ago. This last year our total volume amounted to 10.4 percent. In other words, in 25 years we had gained only 1.3 percent of the total volume. So I do not believe that some of